Ethics & Public Policy Center

2014 Bradley Symposium: Remarks by Henry Olsen

“America’s Prospects: Promise and Peril”

The Mayflower Hotel, Washington, D.C.

June 18, 2014

Speaker: Henry Olsen, Ethics and Public Policy Center

Henry Olsen

Henry Olsen: I was asked to speak about political trends that we are experiencing and also to talk about what will we be talking about politically in ten years that isn’t obvious now. I’d like to start just with a couple with some of the political implications of what Karlyn spoke about. Then I’d like to focus primarily on what are we going to be talking about in ten years that we aren’t talking about now.

You cannot under estimate the political importance of the growth of the non­-white population. For each of the last five presidential cycles, the percentage of voters who are non-white has increased by 2 percent per cycle. At the current rate of growth, by 2024 non-whites will comprise approximately 32 to 34 percent of the electorate. At that point, if the Republican candidate is not receiving 64 percent or more of the white vote, which is a percentage that Republicans have only received in two elections in the modern era, they will not win. So, winning a larger share among minorities is extremely important for Republicans.

We also need to recognize that all non-whites are not the same and they are geographically concentrated. Hispanics are heavily concentrated in the Southwest, California, Florida, New York and Chicago. They are becoming important in places like North Carolina and Iowa, but when you look at where Hispanics live, they tend to live in these areas I mentioned first.

Mexicans dominate among Hispanics in the Southwest, but Hispanics in Florida are Central American, Cuban or Puerto Rican. Texas Hispanics have consistently delivered the highest Republican voting share among any group of Hispanics outside of the Miami Cubans. How do Texas Republicans attract them? There’s many things they do, but consider this: aside from George W. Bush, which Republican has done best among Hispanics in Texas in the last ten years? The answer is Rick Perry. He received almost 40 percent of their votes in 2010, and it was not an effect of the 2010 wave. He did worse among whites in 2010 than other GOP candidates did in 2012.

Asians are also growing, and they are heavily concentrated in California, Hawaii and New York. Many also live in Virginia, as Barbara Comstock, the candidate in a swing Congressional District in the Northern Virginia suburbs, underlies with her regular attendance at Indian and Sikh events. But one thing is true of most Asian immigrants: they are overwhelmingly non-Christian. What does that mean for the future of the conservative coalition?

Religiosity is an important factor too. You should not underestimate the decline in attraction to Christianity, but you shouldn’t overestimate it either. We’re not going to become Europe and I can tell you that from exit polls.

In American exit polls we ask about religiosity by asking, “How frequently do you attend church? Seldom or never? Once a month? Once a week? More than once a week?” Sweden’s exit poll asks the same question about religiosity. Only the most frequent attendance they ask about is, “Do you attend once a month?” We’re not going to get anywhere close to that any time soon.

Those are some of the political implications of the demographic data that Karlyn talked about. What I would like to really focus on is what I consider to be the overriding economic issue of our time. It’s one that is currently affecting virtually every country in the developed world, and is having political effects in every country in the developed world. It is not secular stagnation of the economy overall, it is not a problem of declining wealth, nor it is it a problem of inequality in the sense that the rich are getting richer. It is the economic stagnation of a particular segment of people in the developed world, the working class.

What I’ll show is that in America, the working class over the last 15 years has, as far as incomes has concerned, has been stagnating or in some cases declining in inflation adjusted income terms. I’ll talk about how there’s a reason why we can have dynamic growth nationally and stagnation among a certain segment of the American populaces because of the way that the economy has changed since 1981, namely the opening up of markets, both labor and capital and investment markets, over a vast new range of countries that were not open to world investment previously because of political factors.

These effects have created and will continue to create resentment and discord among the people who are, frankly the losers in the modern economy. And these have been and will continue to express themselves politically in ways that we have not seen in the western world in many decades.

I’ll conclude by saying I think this is a fabulous opportunity for conservatives. The left will offer is state control and redistribution because they understand people as material objects, but we understand people as human beings. The left can feed their stomachs, but only we can feed their souls.

First, let me then go to the point about income stagnation. I took a look recently as Census Bureau income data, because I wanted to know what actually happened, not just in the last few years, because we all know that the Great Recession hit people at the bottom of the scale particularly badly, but what happened during the Bush years when there was growth. I found that no matter how you cut it, if you are somebody who does not have a college degree, if you are somebody who is not overly risk taking, who is not overly talented, and who is of average skill set, your incomes declined or stagnated even during the Bush years when the economy grew. I looked first at looking at income by education and found that if you had only a high school diploma, or if you dropped out of college (a little under half of the American workforce falls into one of those two groups) your incomes rose in the 1990’s, but fell during the Bush boom. They fell between 2003 and 2007 when the economy grew, and then they plummeted even more after the Great Recession.

Now there are lots of reasons why that may not be the right way of looking at it. In particular, older people today in the last decade tend to be less educated than the whole population and as they retired I could have simply been seeing people going on Social Security.

So I also looked at age. Looking at income by age should control for the phenomenon I mentioned before because we’re comparing like to like, 65 year olds and 65 year olds, 25 year olds to 25 year olds, and so on. As each age group gets more educated overtime- as they have been–you should see incomes rise because income generally rises with education. But that wasn’t the case. Americans younger than 35 saw their incomes modestly recover during the Bush boom, but remained during their Clinton era peak. Those between 35 and 44 saw their incomes stagnate and those between 45 and 54, who are historically the highest earning Americans, saw their inflation adjusted incomes decline during the Bush boom. These are the worst records for any age group since I could find going back to 1967.

I then took a look at a third set of data. The Census Bureau divides households into incomes quintiles, which is simply placing households into income groups relative to one another. You look and see what all households made and then place those with the lowest 20 percent of incomes in the 0 to 20 percent range, those in the next lowest 20 percent in the 20 to 40 percent range, and so forth. I looked at that because if everybody’s real income is rising then the upper bounds of the real income that should be able to go into that should rise also.

During the 70’s and the ’80s and ’90s what I found is that during recoveries the upper bound of the income quintile rose for each of the five quintiles, because the share gains from the economy were being distributed across all types of households. Inequality may have been increasing, but everybody’s boat was rising; some people’s boats were just rising faster than others.

That did not happen during the Bush boom period. The upper income level for each of the bottom three income quintiles, which is to say the 60 percent of households at the lowest share of the income distribution, reached their peak in 1999 or 2000 and never regained that level before the Great Recession. The upper limit on the fourth quintile, the people who make between 60 and 80 percent relative to other Americans, was up only 1 percent over its 1999 peak. Almost all of the income gains during the Bush recovery era accrued to the top 20 percent.

So, what does this mean as far as what we should be looking at politically? What it means is that while we can create new jobs and we can create economic growth if the Bush years are an indication, it’s not necessarily going to help the person who’s in the middle, or particularly the people I look at in the lower middle.

Why might this be the case? Why would this be the case that it didn’t happen during the Clinton years, it didn’t happen during the Reagan years, it didn’t happen during the Johnson years, but it did happen during the Bush years? The difference is the opening of the world economy. The fall of the Berlin Wall and the intellectual collapse of communism and statism put billions of people into the labor force, a change that started in the early 1990s but really took off in the 2000s.

To give you a set of numbers, if you look at China and India and Eastern Europe and Mexico, all of which which abandoned statism around the same time and underwent economic liberalization, nearly 3 billion people gained access to Western investment, Western capital, and Western technology who didn’t really have access to them before. It would make perfect sense that since market capitalism distributes capital to its most efficient use, i.e. the highest rate of return, that people would want to invest in these places where it was appropriate.

Since I’m not an economist, I like to think about productivity in a simple way. If you think about the Industrial Revolution, what really happened was we gave men machines. Productivity is really a simple equation: man plus machine equals money.

Before we could generate machines that had their own energy sources, like steam power, we did not have wealthy societies. But once we invented these things and gave them to men, we created wealth, massive amounts of wealth.

Accordingly, there are really only four ways to increase productivity: give a man a machine, give a man a better machine, train a man to use a better machine, or organize the workforce to use fewer men and more machines. That’s efficiency and productivity in a nutshell.

Of these, probably the fastest way to increase productivity is what first happened in the developed world and is now happening in these new economies, which is to give men machines. Prior to 1989, billions of people lived in a world where they did not have regular access in their productive capacities to machines. They lived on farms, they used animals, they used tools, but they did not use machines. Now that they are being given machines, we’re seeing massive increases of investment, massive increases of wealth, in these places which is a wonderful thing. Billions of people are being raised out of poverty and millions of new jobs and new interesting jobs and wealth are being created across the world, in the developed world and in the developing world.

I am not against free trade, I am not against innovation, but we can’t ignore the distributive effects of these on some people in the developing world. We tend to overlook this because until recent times we always had a labor supply of people in developed countries who still had not yet been integrated into the machine economy. As recently as 1940 18 percent of the American labor force lived on farms. These were not the massive mechanized farms of today; these were still places where a lot of people only used tools. Today only 2 percent of Americans live on farms and these farms are highly mechanized. The same thing has happened throughout the Western world, in the sense that people moved from farm to factory, were given machines, trained in better machines and we gained a lot of wealth.

If you have low skills today, you’re going to be in competition with people around the world because of free trade and the global movement of capital. These people will not become poor, but they will see pressures that they did not face before. They will see pressures on their standard of living; they may have to take a job at $11 an hour when they used to have $16 an hour. Or in Europe, which has a much more stagnant labor market, you may be on unemployment for three years, or you may be in state-supported job training programs.

Increasingly in the Western world we see people who are in these marginal situations go on disability. Let me talk just a minute about disability insurance in America. Disability insurance is one of the fastest growth and most underappreciated parts of the federal budget. Add how much we spend on checks through the Social Security Disability system, which is $140 billion a year, plus the fact that these people receive also usually receive Medicare or Medicaid, to how much we spend on other disability programs, both in the Veterans Department and in other places. We spend 2 1/2 percent of GDP on disability, or nearly $400 billion a year, if you add all these payments up.

Ten million people receive disability checks each month through the Social Security Disability program, and millions more receive them from other programs. This presents an enormous temptation for somebody who is a low skilled person. Let’s say you’re 55 years old and you lose your factory job and you’re in a slow growing area and the only jobs, if you can find one in your area, are worth 9 or $10 an hour. The way we’ve defined our disability system is that if you have a back pain or mental impairment, depression, and you have poor job opportunities you’re eligible to become “disabled”. These people look and they say, “I can work with my pain, I can work at a job I don’t like and I can get $10 an hour. Or I can say I can’t work anymore, I’m disabled and get $1,000 a month from Social Security plus Medicare for the rest of my life.” How many people wouldn’t be tempted by that?

During the Bush years, we saw, even during growth, record high numbers of disability applications. Annual applications for SSDI rise and fall with the unemployment rate, and have for a while, but annual applications remained below 2 million until 2001, in the high tech recession. Applications rose then by almost 50 percent and remained at historic highs during every single year of the Bush boom. And now post-Great Recession we have seen another 33 percent hike in applications to hit nearly 3 million people a year who are asking for SSDI Checks.

You know want to know why labor force participation is at a 30 year low? This is one important reason: there are millions of people who will not go into the labor force while their disability application is pending.

What are the political effects of these trends? Well, we saw some of this in the recent European elections. Anti-Euro Parties and nativist parties massively increased their share of the vote. Virtually every one of those parties in every one of those countries got votes from the same sort of person. They all based their votes in areas that are home to older, native citizens who are low skilled, who either can’t find jobs or can’t find good paying jobs.

If you’re European and a citizen and you live in a place that was the hot factory town in 1930, you are highly likely today to be one of the people who is so discouraged that you’re voting for an anti-EU, anti-immigration protest party.

Now, in America we won’t see new political parties, but we’re seeing the same sort of populism rise up, the resentment that somebody is winning and they are losing and it’s not quite their fault. It’s popping up in different ways: it’s an element of the Tea Party’s appeal; it’s an element of the populism of the left; it’s an element of why Elizabeth Warren can win an election in Massachusetts, where the key swing constituency is the white, working class that voted for Scott Brown in 2011 but who switched over to her in 2012.

These people want three things no matter where they are. They want comfort, they want dignity and they want respect. They want a decent standard of living, but they don’t want a hand out. They don’t want to live on unemployment or disability for the rest of their life, they want a job. They want clear rules that treat everyone fairly, and they want citizenship to matter. They don’t want to be treated as disposable people.

I think the parties in Europe focus on immigration and anti-EU policy is because what their voters are effectively saying, “We’re not being protected. We’re facing competition from foreigners overseas, and we’re facing competition from foreigners at home, and the people who run our countries don’t care about us.”

The fact is, if you’re over 45 or 50, you’re highly unlikely to learn enough new skills to move into a new phase in the productive economy. And you’ll vote for another 40 years, because your long life expectancy mean you’ll be voting in your 70’s, 80’s, or 90’s. This is a political problem that’s not going to go away any time soon. Whichever party taps into this is the party that’s going to put together a winning coalition ten years from now.

That’s partly because there are so many of these people, but it’s also because of the way they’re distributed. D.C. politicos talk about the growth of college educated white, and the growth of non­-whites nationally, but this has not hit the industrial Midwest. The people who vote in the industrial Midwest are still largely whites without a college degree. They comprise between 48 and 56 percent of the electorate in every one of the states in the industrial Midwest that is possible for a Republican candidate to win. One reason Mitt Romney is not president is that these people did not vote for him. They either stayed home- turnout was massively down in these areas throughout the industrial Midwest -or they stayed with Obama. That’s because they reacted to whether or not an answer either candidate had to their problem, or met what they actually wanted; comfort, dignity and respect.

The sad truth for conservatives is that in 2012, voters who wanted these three things too often felt only Obama offered them or that there was not a dime’s bit of difference between the two men.

I think this is a massive opportunity for conservatives in 2016 and beyond, however, because I don’t think the left can give them dignity or respect. The left’s top down, state-driven economic model entrenches crony capitalism, it entrenches rent seeking, it entrenches unfairness by people who get wealth by who they know rather than what they do. They cannot give average people with low skills respect, because they cannot create rules that fairly treat people with access or without access. They also can’t give people dignity. The left’s answer is always to give a handout, not a hand up. Take a look at disability; they see the same problems that I do. The Brookings Institute and Center for American Progress, two liberal think tanks, put together their own disability reform that basically created a new massive, expansive entitlement by expanding the definition of disability and giving a uniform policy for everybody. How does that help get people back into the workforce?

Ten years from now we’re all going to be talking about this. We conservatives need to be ahead of the curve now, not simply to adopt the policies we normally discuss like tax code and entitlement reform, but also to recognize that in American politics there will be 10 to 20, maybe 25, percent of the voting population who are not young enough to benefit from skills training and who are going to be negatively impacted by the changes of this economy. They vote, they will vote for comfort, dignity and respect and a conservative movement that ignores that will be a conservative movement that will wish it had been on top of this ten years earlier.